   Chapter 9, Problem 16P Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

Solutions

Chapter
Section Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

NONCONSTANT GROWTH Carnes Cosmetics Co.’s stock price is $30, and it recently paid a$1.00 dividend. This dividend is expected to grow by 30% for the next 3 years, then grow forever at a constant rate, g; and rs = 9%. At what constant rate is the stock expected to grow after Year 3?

Summary Introduction

To determine: The constant rate that stocks are expected to grow after 3 years.

Introduction:

Horizon Value:

It is the present value of all cash inflows and outflows that are likely to occur at a future date with g constant growth rate after that date. The time period up to which the company has non-constant growth rate is known as the horizon date.

Explanation

Given information:

Non-constant growth rate for 3 years is 30%.

Dividend paid is $1. Current stock price is$30.

Required rate is 9%.

The formula to calculate present value is:

P0=D1(1+rs)+D2(1+rs)2+D3(1+rs)3+D3(1+gn)rsg(1+rs)4=D1(1+rs)+D1(1+gs)(1+rs)22+D1(1+gs)3(1+rs)3+D1(1+gs)3(1+gn)rsgn(1+rs)3

Substitute $30 for P0 , 0.30 for gs$1 for D1 and 0.09 for rs in above formula.

$30=$1(1+0.30)(1+0

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

How can report writers decide what type of graphic to use in a report?

Essentials of Business Communication (MindTap Course List)

Describe four risk responses.

Accounting Information Systems

What is inflation and what causes it?

Principles of Economics (MindTap Course List)

RECEIVABLES INVESTMENT McDowell Industries sells on terms of 3,10, net 30. Total sales for the year are 912,500...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List) 